DuPont Can See Upside From Recovering Demand For Performance And Safety Materials

DuPont (NYSE:DD) had a rough quarter last quarter as the company reported a 9% decline in revenue from continuing operations to $7.4 billion. The stock has struggled since and has declined by more than 10% since the release of 2012 Q3 earnings against a slight 0.4% decline in the S&P. However, we believe there could be upside to the stock’s intrinsic value if the demand improves for its performance and safety materials division driven by a recovery in global economic growth. Performance and safety materials make up for more than 55% of our estimated stock price for DuPont.

Our current price estimate is around $42, which is about 5% below the current market price.

Last quarter’s disappointing results were primarily due to a 19% decline in sales in the performance and safety materials segment, which contributes to over half of our price estimate for the company.

We currently estimate that the global specialty chemicals market should grow at a CAGR of 4% to $608 billion by the end of our forecast period. However, higher infrastructure investments in China and elsewhere in Asia, the stabilization of European economies and continued growth in U.S. housing, could accelerate growth beyond our current expectations. If this market were to grow to a market size of around $663 billion by the end of our forecast period, implying a CAGR of 5.3%, this could add about 10% to our forecast. Our estimate of the driver is shown below.

Market share gains in high performance materials

During the economic downturn, demand for high performance materials declined worldwide, affecting both selling prices and volume for DuPont, and we estimate its market share was 3.4%. Led by a broad-based demand recovery across industries in 2010-11, DuPont’s share rose to around 3.9%.

We estimate the company’s market share for performance and safety materials to show slow-to-moderate growth, reaching around 4% by the end of our forecast period. However, if DuPont’s technological and brand leadership as well as better operational performance improves uptime and yield improvements, we could see greater market share gains in the segment. In a scenario where this market share to reach around 4.2%, this would add another 5% to our price estimate.

The above scenario shows the sensitivity of DuPont’s value to both the market size and market share of its high performance and safety materials division. Small improvements in these two metrics, in particular market share gains, could add about around 15% to our forecast.

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